The trigger clause

MANY contracts include a clause which provides a trigger for the activation of that contract. A common example is the clause stating that an agreement for the sale of land or property is conditional upon the approval of bond financing. Another example would be a clause rendering a contract conditional upon the passing of a shareholders’ resolution on the part of one of the contracting parties. Such a clause is referred to as a condition precedent or a suspensive condition.

The effect of fulfilment of that condition precedent is that the whole contract becomes enforceable. This enforceability operates retrospectively as if the contract had been unconditional from the outset.Non-fulfilment of a condition precedent normally renders the contract void. During the period after signature of the agreement and until the fulfilment of the suspensive condition, the rights (and concomitant obligations) of the parties are held in abeyance, but there is a binding agreement between them, which neither party may renounce, pending fulfilment of the condition.

The suspensive condition may apply to all of the rights and obligations of the parties or only to some of them. Those that are not suspended must be met, regardless. Where the parties have not expressly fixed a time period for the fulfilment of a suspensive condition, it is implied that it must be fulfilled within a reasonable time. What is reasonable will depend on the circumstances of that particular case. If the condition is not met within a reasonable time the contract will be void, subject to the principles which are discussed below.

One can easily envisage a situation where a party to a contract, subject to a suspensive condition, might change his mind about being bound to the terms of that contract, and who might set about frustrating the fulfilment of the condition with the intention that it will not be met, thereby releasing him from his contractual promises. To allow such manipulation would be unjust and for that reason our law prevents a party to a conditional contract from deliberately preventing the fulfilment of the condition precedent and then asserting that he is not bound by the contract because the condition has not been fulfilled. This principle is referred to as the doctrine of fictional fulfilment and is based on grounds of equity.

The doctrine of fictional fulfilment protects the innocent party in these circumstances, by requiring that the contract be enforced as though the condition precedent had been fulfilled. In order to initiate the fictional fulfilment, the innocent party will have to show that the other party deliberately prevented the fulfilment of the suspensive condition. This principle of law is based on the understanding that a party to a conditional contract has a valid and justifiable hope that his contractual rights will become enforceable at some future date. The doctrine protects this legitimate expectation by applying the equitable rule that a party cannot take advantage of his own default to the loss or injury of another.

The doctrine of fictional fulfilment applies to a deliberate and intentional prevention of the fulfilment of a condition precedent, no matter how laudable the motive of such action or failure to act. The negligent failure to fulfil a condition is not sufficient to bring the doctrine into operation – there must be a direct intention to prevent the obligation from becoming enforceable.

The party accused of deliberately preventing the fulfilment of a condition will quite often be heard to say that it did not take the necessary steps towards fulfilment of the condition because any effort on their part would have failed, in any event, to bring about the fulfilment of the condition. Where that party is under a positive duty to try to have the condition fulfilled, the courts take the view that it is equitable to hold that party liable as though the condition had been fulfilled unless it can be shown that the steps to be taken would have been an utter waste of time and money. In other words the task of avoiding the application of the doctrine of fictional fulfilment in these circumstances is not easily accomplished.

There is also a series of cases which extends the application of the doctrine of fictional fulfilment beyond instances relating to the nonfulfilment of a suspensive condition. The same principles have been applied in cases involving the deliberate non-fulfilment of ordinary terms of the contract, that is, those which are not suspensive. For example, the court applied the doctrine in a case where a supplier sold equipment and was entitled to payment once the equipment had been installed and tested. The purchaser prevented the tests from taking place but this term of the contract was deemed by the court to have been performed, giving rise to liability for payment of the purchase price by the purchaser.

Another form of extension of the doctrine is to be found in the context of fulfilment of resolutive conditions. A resolutive condition is one which provides for the termination of the contract after an interim period of operation. It brings the contract to an end upon the happening of a specified event, for example. A fairly common resolutive condition in property deals is one that provides that the sale is to be regarded as void if the necessary planning permission is refused.

It has been held in cases relating to resolutive conditions that, where one party has deliberately caused the fulfilment of that condition thereby relieving him of an obligation which he bore up until the resolutive condition was fulfilled, he nevertheless continues to be bound, by application of a variant of the doctrine discussed above, and which might, rather clumsily, be referred to as the doctrine of fictional nonfulfilment. The parties are then required to act as though the resolutive condition had not been fulfilled.

Contracting parties are expected to keep their promises and the law will not countenance a situation where a party acting in bad faith obtains a benefit from his actions, contrary to what was intended when the deal was struck.

ENS - Edward Nathan Sonnenbergs

Janine Lee

South Africa

Source: Lexology

Unlawful application of a lien clause

A service provider can rely on a debtor/creditor as security for its claim. This type of lien, conferred by virtue of an agreement between the creditor and the debtor, is a sub-species of a broader right to retain physical control of another’s property, whether movable or immovable, as a mechanism for securing payment of a claim, until the claim has been met. In other words, the service provider, who makes provision for such a lien in its contract, can refuse to release goods which are in its possession until it has received payment.

An example of the clause which introduces this right into a contract is that often used by clearing and forwarding agents and which might be worded along the following lines: “All goods shall be subject to a special and general lien either for moneys due in respect of such goods or for any other moneys due to the company from the customer, sender, owner, consignee, importer or the holder of the bill of lading or their agents, if any.” Such clause would go on to deal with the right of the clearing and forwarding agents to sell the goods after notice has been given to the debtor, if the debt remains unpaid. Other examples of creditors who may make provision for a lien in their contracts would be builders, motor vehicle repairers, warehousemen, transporters and professionals such as lawyers, accountants and architects.

A clause with wording similar to that quoted above has been tested and applied in cases which have come before our courts in the past – see for example Section 27 Ridgeprop CC t/a Tile Distributors SA v Sharaf Cargo (Pty) Ltd 2009 JDR 1022 (KZN).

The point which immediately jumps out, on reading this clause, is that it envisages a lien which can be exercised over goods which are unrelated to the debt.

Our law accepts that it is reasonable for a creditor to require security for its claim – much commercial activity is entirely dependent on this construct. Our courts recognise the validity of a lien which can be exercised over goods of a debtor in the possession of the lien holder even where the debt relates to other goods of that debtor which may no longer be in the possession of the lien holder. See for example the case of Danzas Trek (Pty) Ltd v du Bourg and Another 1979 (4) SA 915 (W).

Our law, relating to all types of lien, dictates that possession of the goods which constitute the subject matter of the lien is an intrinsic prerequisite for the exercise of this right by the lien holder. It is worth noting that our courts have found, most recently in Oceana Leasing Services (Pty) Ltd v BG Motors (Pty) Ltd 1980 (3) SA 267 (W), that where a lien holder voluntarily releases the property subject to the right, the lien is lost and remains irrevocably extinguished, and it does not revive if the property at a later stage reverts to his control. Hence, a service provider may well have to look to other goods in its possession where it has already delivered or released the goods in respect of which the debt arose.

There is little for the debtor to complain about if the goods which are subjected to the lien are owned by that debtor, who has failed to pay the debt, even if the debt relates to other goods of that debtor.

A more problematic application of such a clause arises when the lien holder contracts with an agent who acts for several principals. In that scenario one may find that a debt relating to goods owned by principal “A” are secured by a lien over goods belonging to principal “B”.

The fact that the clearing and forwarding agent is appointed by an agent who is not the owner of the goods over which the lien is exercised will not ordinarily be a problem for the service provider seeking to enforce its lien, because the agent will have been authorised to bind his principal, the owner, to the terms of the contract concluded with the clearing and forwarding agent. It is only when he acts as agent for several owners that issues of ownership are put in the spotlight.

The lien discussed above is a personal right which the lien holder can exercise against its debtor. This type of lien is not one which can be exercised against the world at large, because of its personal nature.

This personal right can be exercised by the service provider against the agent and accordingly also against its principal, the owner of the goods which are the subject of that lien and who owes the debt, but not against another person who owns goods which happen to be in the possession of the service provider, by virtue of another contract between them.

Because of the personal nature of the lien, where an agent acts for two different principals, the goods belonging to principal “B” cannot lawfully, we submit, be the subject of a lien arising from a debt due in respect of the goods of principal “A”, despite the wording of the clause.

ENS - Edward Nathan Sonnenbergs

Janine Lee

South Africa

Source: Lexology

Is self-help allowed under our new constitution?

Many of us are far too quick to enter into agreements without paying close enough attention to their terms. The folly of this laissez faire approach becomes all too clear when things go wrong and we are surprised to find ourselves at the wrong end of the bargain.

It is at this point that we are reminded of the principle of South African law to the effect that a contracting party is bound by the terms of any contract which has been concluded by him/her. The correct time to complain about a contractual term is before the conclusion of the deal, and not later when the effects of this term are felt.

Our courts recognize that people’s right to freedom of contract should be respected and that this entails giving effect to the terms of agreements reached between the parties, even if these terms are onerous or prejudicial to the interests of one of the parties. We are free to agree to any terms, as long as these are not unlawful. Having agreed to a set of terms, we must be held to this bargain. Our law has also always recognised that, notwithstanding the aforesaid principle, effect ought not to be given to contractual terms which are contrary to public policy. The effect of the new Constitution of South Africa has been, inter alia, to flesh out the meaning of “public policy”. In short if a clause constitutes an unwarranted infringement of a right guaranteed in terms of the Bill of Rights, that clause may be susceptible to attack on the basis that it is contrary to public policy.

The approach of our courts is to conduct an enquiry where the first question is: Is the contractual clause in question per se contrary to public policy? If the answer is in the affirmative then the enquiry need not go any further - the clause is invalid. A contractual term may appear innocuous but its effect in particular circumstances may well offend public interest. Therefore, even if the first question is answered in the negative, the enquiry is not necessarily complete and a further question is posed, namely - Does the operation of the clause in the prevailing circumstances render it contrary to public policy?

In order to answer the questions relating to public policy regard must be taken of our Bill of Rights. One of the rights enshrined in the Bill of Rights is the right of access to our courts, which reads: “Everyone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum.” This right is directed against a tendency for parties to take the law into their own hands.

Our courts are constantly working through a massive backlog of civil cases and legal process can drag on for years before any result is achieved. It is not surprising, therefore, that attempts are made to obviate the need to refer issues to the courts. For example, a company which repairs a motor vehicle or electronic equipment may seek the power to sell off the car or tv if the repair costs are not paid on time. A trucking company wants the right to sell off goods which it has transported, if its charges are not paid when due. Do contractual clauses which are aimed at allowing the repairer or transporter to auction goods, without obtaining a court order, fall foul of public policy because they amount to an abuse of the right to access to our courts?

This argument was made in the case Juglal NO and Another v Shopright Checkers (Pty) Ltd t/a OK Franchise Division1 where the court analysed the contractual clause in question and concluded that it regulated the rights of the parties vis-á-vis each other but said nothing about ousting the authority of the courts or restricting the parties’ access to the courts or making a court application unnecessary before action could be taken to perfect the security contemplated in the clause. However, the court did say “That the respondent subjected the terms of the contract and its implementation to the intervention and oversight of the court takes much of the sting out of the appellant’s complaint about the arbitrary, unreasonable and oppressive nature of the contractual powers conferred on it.”

In other words, when considering the second leg of the test discussed above, the court was positively influenced by the fact that the appellant had sought the authority of the court before proceeding to sell the goods which represented his security, even though the clause did not necessarily compel the appellant to do so.

A clause which seeks to oust the jurisdiction of the court would be unconstitutional. If the clause does not prohibit an approach to the court or expressly make an application to court unnecessary, it is probably not, per se, contrary to public policy.

However, an attempt to sell the goods without first seeking court authorisation would often be found to be an infringement of the right of access to court which is enshrined in the Constitution. In other words it may be found to be contrary to public policy in its effect, especially where the debt is in dispute. It is in respect of the second leg of the test highlighted above, concerning the implementation of the clause in these circumstances, where such a clause may fail the test imposed by our new Constitution.

ENS - Edward Nathan Sonnenbergs

Janine Lee

South Africa

Source: Lexology

Piracy costs you money

As the shipping industry continues to count the human and material costs associated with piracy in the Gulf of Aden, an increasing number of shipowners and charters are going on the offensive and placing armed security guards on their vessels.

Shipowners and charterers navigating the Gulf of Aden have seen insurance premiums for kidnap and ransom increase tenfold as piracy escalates. According to Lloyd’ s List, Economic Cost of Maritime Piracy Report, the estimated excess cost of insurance due to Somali Piracy is between $460m and $3.2 bn per year.

War Risk cover has risen dramatically, and shipowners seeking to lower costs and protect their assets, are pushing for as much as 25% discount on war risk policies, by employing armed security guards on board their vessels. As consumers of goods imported into South Africa, we pay a portion of these added expenses in the form of increased costs for these goods. We have an interest in any steps which limit the financial impact of piracy.

While the benefits of such an approach may be self evident, the bureaucratic and administrative complications for a vessel, which calls at multiple ports in numerous different countries, and therefore enters many different legal jurisdictions whilst carrying armed personnel and ammunition, are daunting. Increasingly shipowners and charterers seek advice on the laws applicable in these many jurisdictions, since they have no wish to fall foul of any of the myriad of applicable local laws. It is axiomatic that breaches of the law have potentially dramatic consequences for the individuals involved, but these contraventions also impede the business of international commerce and shipping, introducing avoidable delays and thereby escalating costs.

The relevant provisions of South African law are to be found in the Firearms Control Act (60 of 2000) and in particular section 73, which states, “no person may carry in transit through South Africa any firearms or ammunition without an in-transit permit issued in terms of the Act.” A firearm on board a vessel which calls at a South African port is in transit, even where that weapon remains inside a secure safe on board the vessel throughout her passage through South African waters.

Ordinarily shipowners or charterers appoint independent security companies to provide the guards and their firearms, because such companies have the expertise and experience required to face the pirates in circumstance which often approximate wartime confrontations. These security companies are responsible for obtaining the necessary permits well in advance of the arrival of the weapons in South African waters.

An issue that has arisen recently, which is of great concern to shipowners and the seafarers they employ, concerns the question of whether people other than the security guards, such as the Captain of a vessel, can be held responsible where firearms are brought on board for use by the security guards, but where no permits have been issued. In a recent incident, police boarded a vessel immediately after firearms had been delivered to that vessel, in an apparent sting operation, and it was then discovered that the requisite permits had not been issued. The Master was faced with the possibility of arrest even though he was ignorant of our laws relating to permits, and was completely unaware of the fact that no permits had been obtained in advance. The Master was accused of responsibility for this contravention of the Act by virtue of his position as Captain, being the person in charge of the vessel where the firearms were found at the time. It was only due to the fact that the Master’s evidence may prove useful in future criminal proceedings against the South African company which provided the illegal weapons that the Master avoided being detained and charged under the Act.

It is clear, from this and other similar incidents, that the South African Police have focused their attention on potential violations of firearm laws on board vessels calling at our ports. In circumstances where the proper permits have not been obtained, otherwise innocent parties can be drawn into police operations, resulting in personal hardship, delays and additional costs, all of which ultimately impact on the consumer, already burdened by the costs of piracy.

ENS - Edward Nathan Sonnenbergs

Janine Lee

South Africa

Source: Lexology

What can be done to make the dispute resolution process more rewarding?

In many instances a party who has suffered some form of loss at the hands of another does not have access to the documents, recordings or data which would enable that aggrieved party to enforce its rights against the perpetrator of the harm.

In the past the aggrieved party would institute action and would subsequently seek access to these documents, recordings or data in the course of the discovery procedures provided for in the court rules. This may mean that the true grounds of the action for recovery are only revealed at a fairly late stage once the discovered documents, recordings or data have been considered. Amendments to the pleadings (resulting in additional costs) may be necessary. At worst the discovery process may make it clear that the wrong party has been sued, and that the aggrieved party ought to have looked elsewhere to make good its loss.

These documents, recordings or data are only available once litigation is at an advanced stage. They may expose solid grounds for liability on the part of the Defendant. Had access to these documents, recordings or data been available at the outset, there would have been a strong incentive for the Defendant to settle the claim without compounding the harm by forcing the aggrieved party to embark on an expensive and time consuming process of enforcing its rights.

In the words of Cameron JA in his dissenting judgement in UNITAS HOSPITAL v VAN WYK AND ANOTHER 2006 (4) SA 436 (SCA) “Litigation involves massive costs, time, personnel, effort and risks. Where access to a document can assist in avoiding the initiation of litigation, or opposition to it, the objects of the statute suggest that access should be granted.”

The statute to which Cameron JA refers is the Promotion of Access to Information Act 2 of 2000 (PAIA). This Act is aimed at giving effect to every person’s right to access to information expressed in Section 32 of the Constitution. Section 32 of the Constitution provides:

Everyone has the right of access to:

(a) any information held by the State; and

(b) any information that is held by another person and that is required for the exercise or protection of any rights.

An aggrieved party can therefore utilise the mechanism provided for in PAIA with a view to accessing documents, computer files, tape or video recordings, email messages and the like.

A decision regarding whether to employ the procedure embodied in PAIA must be made at an early stage of any dispute resolution process. Once legal proceedings (in the form of an action or application launched in a court of law) have commenced, the parties to that legal process are restricted to utilising the applicable court procedures and cannot then seek to apply for access in terms of PAIA.

An application for access to information under PAIA can be directed either at a public body such as a government department or a state owned enterprise, or at a private body such as a natural person or commercial corporate entity. The requirements to be met by an applicant when applying for access to information in the hands of a private body are more onerous, since in addition to meeting the requirements of an application directed at a public body, the applicant must show that the record in question is required for the exercise or protection of a right. The applicant need not disclose the reason for its request, where this is directed at a public body.

There are certain limited grounds on which either a public body or a private body may legitimately refuse to give access, and these include that access would involve unreasonable disclosure of personal information about a third party, or if the record in question contains trade secrets of a third party or information supplied in confidence by a third party which could reasonable be expected to put that third party at a disadvantage in contractual negotiations or commercial competition. Other grounds relate to the endangerment of the life or physical safety of individuals or of security of buildings, transport systems or other property. An obvious exception is a record which is privileged in legal proceedings since one cannot access records under PAIA which would protected from discovery in terms of the normal rules applicable in legal proceedings.

The obvious advantage of the PAIA process is that the aggrieved party will obtain the documentation much sooner. This fact has a number of important implications.

Very often documents, recordings or computer data are lost or destroyed over time. Obtaining copies at an early stage will avoid any prejudice arising from this type of incompetence. If the aggrieved party obtains all relevant records at an early stage it will be better placed, at the outset, to assess the prospects of success of litigation and to focus on the areas most likely to found a solid case at the trial, thus saving time and money. The lawyers representing the aggrieved party in any legal processes which may follow will be armed with the appropriate knowledge required for accurate pleading of the case, meaning that it should not be necessary to make amendments to the pleadings at a later stage, again saving time and money. The prospective Defendant will be in a position, at an early stage, to more accurately assess their prospects of successfully defeating the claim. If the evidence is such that they must accept that there is a high probability of a court finding against them, they are more likely to accede to a reasonable settlement of the claims, knowing that the aggrieved party is also in possession of this evidence.

Our Courts are very concerned that the provisions of PAIA not be used in circumstances where it is more appropriate to utilise the court procedures which have been in existence far longer. Our Courts do not allow what is termed as “a fishing expedition”.

The applicant would have to show that the records requested are required because they will afford the applicant with a substantial advantage or that there is an element of need. The fact that the records can be obtained from another source may be raised to substantiate a refusal by a private body. It would be helpful, in order to meet this requirement to show, for example, that the documents are necessary in order for the applicant to identify the correct Defendant and/or in order to properly formulate its claim.

When an aggrieved party contemplates proceedings aimed at the enforcement of its rights it would be well advised to first consider whether the mechanism provided for in PAIA can and ought to be employed before launching into formal court proceedings.

ENS - Edward Nathan Sonnenbergs

Janine Lee

South Africa
November 2 2010

Source: Lexology